AC303-CH1Slides

8/11/2019 AC303-CH1Slides

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Environment and TheoreticalStructure of Financial Accounting

Chapter 1


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Financial Accounting Environment

Profit-orientedcompanies

Not-for-profit

entities

Providers of

Financial

InformationExternal

User Groups

Investors

CreditorsEmployees

Labor unions

Customers

SuppliersGovernmentagencies

Financialintermediaries

Relevant

FinancialInformation


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The Economic Environmentand Financial Reporting

A sole proprietorshipis owned by a

single individual.

A partnership isowned by two ormore individuals.

A corporation is ownedby shareholders.

A highly-developedsystem communicatesfinancial information

from a corporation to its

many shareholders.


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Financial Accounting Environment

Relevant financial information is providedprimarily through financial statements andrelated disclosure notes.

Balance Sheet

Income Statement

Statement of Cash Flows

Statement of Shareholders Equity


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Cash versus Accrual Accounting

Cash Basis AccountingRevenue is recognized when cash is received.Expenses are recognized when cash is paid.

OROROR

OR

Accrual Accounting

Revenue is recognized when earned.

Expenses are recognized whenincurred.


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Cash Basis Accounting

Carter Company has sales on account totaling$100,000 per year for three years. Carter collected

$50,000 in the first year and $125,000 in the secondand third years. The company prepaid $60,000 for

three years rent in the first year. Utilities are $10,000per year, but in the first year only $5,000 was paid.

Payments to employees are $50,000 per year.

Lets look at the cash flows.


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Cash Basis Accounting

Year 1 Year 2 Year 3 Total

Sales (on credit) 100,000$ 100,000$ 100,000$ 300,000$

Cash receipts from

customers 50,000$ 125,000$ 125,000$ 300,000$

Payment of 3

years' rent (60,000) - - (60,000)

Salaries toemployees (50,000) (50,000) (50,000) (150,000)

Payments for

utilities (5,000) (15,000) (10,000) (30,000)

Net cash flow (65,000)$ 60,000$ 65,000$ 60,000$

Summary of Cash Flows

Cash flows in any one year may not

be a predictor of future cash flows.


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Accrual Basis Accounting

Year 1 Year 2 Year 3 Total

Revenue 100,000$ 100,000$ 100,000$ 300,000$

Rent Expense (20,000) (20,000) (20,000) (60,000)

Salaries Expense (50,000) (50,000) (50,000) (150,000)

Utilities Expense (10,000) (10,000) (10,000) (30,000)

Net Income 20,000$ 20,000$ 20,000$ 60,000$

Summary of Operations

Net Income is considered a better indicatorof future cash flows.


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The Development of FinancialAccounting and Reporting Standards

Concepts,principles, and

procedures were

developed to meet the

needs of external

users (GAAP).


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Current Standard Setting

Supported by the Financial Accounting Foundation

Seven full-time, independent voting members

Members not required to be CPAs

Financial Accounting

Standards Board


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Accounting Standard-Setting


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FASB Accounting StandardsCodification

The objective of the codification project was to integrate and

organize by topics all relevant accounting pronouncements

into a searchable, online database.


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FASBs Standard-Setting Process1. Board receives recommendations for projects.

2. Board votes to add the project to its agenda .

3. Board deliberates the issues at a series of public

meetings.

4. Board issues an Exposure Draft (ED).

5. Board holds a public roundtable meeting on the ED.

6. Staff analyzes feedback and the Board re-deliberates

the proposed revisions at public meetings .

7. Board issues a Standards Update describing

amendments to the Codification.


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Global Accounting Standards

The main objective of the International

Accounting Standards Board (IASB) is to

develop a single set of high quality,

understandable and enforceable global

accounting standards.
http://images.google.com/imgres?imgurl=http://static.soxfirst.com/soxfirst.com/imgname--iasb_chief_sir_david_tweedie_nearly_resigned---50226711--tweedie.jpg&imgrefurl=http://www.soxfirst.com/50226711/iasb_chief_sir_david_tweedie_nearly_resigned.php&usg=__Gy9RcJw3kXz43qTok04Vsuk8KNg=&h=307&w=450&sz=66&hl=en&start=13&um=1&itbs=1&tbnid=ZZl1Wk4J6re1fM:&tbnh=87&tbnw=127&prev=/images?q=iasb&hl=en&rlz=1T4ADRA_enUS352US352&sa=N&um=1http://www.iasb.org/Home.htm


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Efforts to Converge U.S. andInternational Standards

Issues and Concerns: Desire for a single set of global standards Need for standards that are customized to fit stringent legal

and regulatory requirements of U.S.

Possible differences in implementation and enforcementProgress: September 2002: FASB and IASB sign Norwalk Agreement. November 2008: SEC issues a Roadmapwith milestones.

Nov 2011: SEC postpones making convergence decision. July 2012: SEC issues final report on 2-yr adoption study. July 2012: Chief Acct. J. Kroeker resigns. Dec. 2012: M. Schapiro steps down as SEC Chair. CurrentlySEC seemingly backs away from convergence.


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Role of the Auditor

Auditors serve as independentintermediaries to help insure that

management has appropriately appliedGAAP in preparing the companysfinancial statements.


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The Conceptual Framework

The Conceptual Framework has been described asan Accounting Constitution. It provides the

underlying foundation for accounting standards.

FASB Conceptual Framework(Statements of Financial Accounting Concepts)

Objectives of Financial Reporting (SFAC 1, replaced bySFAC 8)Qualitative Characteristics (SFAC 2, replaced by SFAC 8)Elements of Financial Statements (SFAC 3, replaced bySFAC 6)Recognition and Measurement (SFAC 5 and SFAC 7)


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Objective

To provide financial informationthat is useful to capital providers.

Elements

Financial

StatementsConstraints

The Conceptual Framework

Recognition andMeasurement

Concepts

Fundamental andEnhancingQualitative

Characteristics


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Relevance Faithful representation

Predictive

value

Confirmatory

value

NeutralityCompletenessFree from

material error

Qualitative Characteristics ofAccounting Information

Comparability

(Consistency)UnderstandabilityVerifiability Timeliness

Decision usefulness


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Practical Boundaries (Constraints) toAchieving Desired Qualitative Characteristics

Cost

EffectivenessMateriality


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Elements of Financial Statements


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Elements of Financial Statements


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Underlying Assumptions andAccounting Principles


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Recognition, Measurement andDisclosure Concepts

RecognitionProcess of admitting information

into the basic financial statements

Criteria:

1. Definition2. Measurability

3. Relevance

4. Reliability

MeasurementProcess of associating numerical

amounts with the elements.

Measurement Attributes:

1. Historical cost

2. Net realizable value

3. Current cost

4. Present value of

future cash flows

5. Fair value

DisclosureProcess of including additional

supplemental information.

Examples:

1. Parenthetical

amounts

2. Notes to FS

3. Supplemental FS


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Fair Value Hierarchy

U.S. GAAP gives companies the optionto report some or

all of their financial assets and liabilities at fair value

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